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Rating:Three Things to Know From Waddell's Earnings Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, April 25, 2013

Three Things to Know From Waddell's Earnings

Reported by Tommy Fernandez

Waddell & Reed, marketer of both the Ivy brand as well as its own line of funds, had a solid quarter, experiencing growth in the advisor and wholesale channels thanks to a renewed respect for equities as well as product breadth.

First the basics. If you peruse the company's earnings and the SeekingAlpha transcript of the analyst call, you'd see that Waddell reported first quarter net income of $53.9 million, or $0.63 per diluted share, compared to net income from continuing operations of $46.8 million, or $0.55 per diluted share during the first quarter of 2012.

Operating revenues of $316.6 million rose 10 percent compared to the same period last year. The operating margin was 26.2 percent, or 130 basis points lower than last quarter’s high water mark due to higher compensation and payroll tax expenses and two fewer days of management fees in the current quarter.

Meanwhile, assets under management broke $100 billion during the first quarter and reached $103.8 billion at quarter-end. The company reported that sales of $6.8 billion represent a multi-year high, having only exceeded that level once, during the first quarter of 2008. Net inflows of $2.1 billion represent an annualized organic growth rate of nearly 9 percent.

There are at least three strong themes to be gleaned from the analyst call and earnings information. They are:

RETAIL 1: Retail and Wholesale are Nice Channels to be In
RETAIL 2: Customers Aren't Afraid of Product Breadth Anymore
RETAIL 3: Cater to Institutions? Be Ready to Take Some Lumps

Now to drill down on these themes.

RETAIL 1: Retail and Wholesale are Nice Channels to be In
Chairman and chief executive Henry Herrmann had this to say about sales growth at various points during the conference call:

Our Wholesale channel saw organic growth of 16%. We believe it's results are an appropriate comparative measure to most of our publicly traded peers and reflects on our continued success in gaining share in this channel. Barron's annual performance review survey again recognized us as one of the best mutual fund families over the last 5 years. This is the fifth year in a row that Ivy or Waddell & Reed Funds claim either the first or second place in this category.

Sales of $6.8 billion during the current period rose 24% sequentially and 8% compared to the same period last year. Net inflows of $2.1 billion compared favorably to the small outflows experienced in the previous quarter and inflows of $1.3 billion in the first quarter of 2012.

Looking at the contribution of each channel during the quarter, the Wholesale channel saw a material improvement during the quarter. At $5 billion in sales, sales marked a new quarterly record level, increasing 40% sequentially and 12% compared to the same period last year. Inflows of $2 billion were also better than outflows of $77 million during the previous quarter and inflows of $1 billion last year.

Broadening sales remains a top line priority for our company. As the largest contributor to sales, the whole channel plays an important part in this effort. As the supplemental information tables in our press release shows, sales were divided roughly 1/3 into fixed income products, 1/3 into equity products and 1/3 into asset strategies.

Our Advisors channel also saw a record sales at $1.3 billion during quarter. They grew 8% sequentially and 19% compared to the same period last year. Inflows of $190 million compared to the slight outflows during the prior quarter and inflows of $158 million during the first quarter of 2012.

Within our Advisors, the increasing productivity has turned our core focus. During the quarter, we made further progress as average productivity for advisors set a new high at 47,000. We continue to improve in our productivities with the combination of better recruiting, more focus on supporting our advisors and the client's growing use of fee-based advisory products. Better productivity equates to higher sales and higher asset levels.

RETAIL 2: Customers Aren't Afraid of Product Breadth Anymore
Thomas Butch, whose titles include president and chief marketing officer for Waddell, as well as president and chief executive officer of Ivy Funds Distributor Inc., had this to say on the subject of product breadth.

In terms of products, one of the really heartening things is again the breadth of sales being as good as it is. In the top 5 funds, in the quarter, you had asset strategy, obviously flexible mandate, high income, mid-cap growth, and science and technology, obviously, equity portfolio is one of the specialty. And then balance does the top 5 sellers. And so if you look at that basket, it says that we're succeeding across a really, really good span of products. And we always preach internally that breadth equals sustainability. And the breadth just continues to be very encouraging. Relative to the span of distributors, we similarly think that we are well diversified among the important distributors in the business. And some relationships are more mature than others and continue to provide us opportunity to gain share, and some are more at their earlier stages and still very much in a growth phase. So there's a lot of opportunity across the span of distributors. I don't think we're unduly [indiscernible] than any 1 dimension of the distribution world.

Again, I think the underlying point is one that Hank noted in his remarks, which is we have very good breadth and very good performance across that breadth that enables us to create the breadths in the sales that create the sustainability that we're seeking. So if you kind of spin the wheel of where the market goes, which I -- one of the heartening things is I think, over the 10-year life of the Ivy Funds, despite what happened in the market and how it's rotated pretty violently at times across that span, we have had something based on the great work of our investment folks, to take market effectively in any context. And as the market is becoming more supportive of a broad span of asset classes, we're really seeing the benefits of that breadth once again.

RETAIL 3: Cater to Institutions? Be Ready to Take Your Lumps
Herrmann had this to say regarding Waddell's institutional business.

Sales from our Institutional channel were $430 million and net flows were negative $39 million. Interest remains high for products including large-cap growth, core equity and high yield. Our pipeline remains fertile. Flow trends during the first 3 weeks of April remained about the daily average of the first quarter. While trends so far this year have been good, there is little sign of the great rotation that some had forecast. For now, at least the environment appears to be supportive of our business. Operation -- operator, at this time, I would like to poll for questions.

Meanwhile, Butch had these things to say on the subject at various points within the analyst call.

I think generally Hank spoke to the fact that we're continuing to see good interest in a number of our strategies, particularly the core equity strategy. And I'd say that the pipeline in the aggregate remains fertile. We've had a number of final presentations, most of them relating to that strategy here in the first quarter. We had a number in the first quarter and have a number still outstanding in the second. The first quarter did not bear winds, and we're hopeful that will change in the second. So I would say, generally, relative to the appetite for rebalancing, that these equity product -- that equity product and others specifically, continue to gain interest and salience among the consultant community.

I think perseverance and breadth of the offering and relationships with consultants is sort of the triangle. This is a business which we've always told anyone who inquires about it is going to be lumpy relative to the other 2. Certainly, the performance that is translated into sales on the retail side, as in the past, yielded good opportunity on the Institutional side. We have every expectation that will be the case again. It's very heartening to see the number of opportunities into which we are invited, particularly on strategies which a couple of years ago may not have been the case and were not institutional offerings on our part. And so I think on the com we're still very confident and very determined in the Institutional business that we will be successful. But again, it's always going to be lumpier, and we'll have states of opportunity and states of periods where, like in the first quarter, it was a little bit dryer.

Read more in the company's earnings and the SeekingAlpha transcript of the analyst call

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